Last week’s bill auction sets stage for upward sloping yield curve in near term

• Auction saw 3 months yield falling below 6 months’ in over a year
• Market commentators say CB offering amounts below maturing amounts is a tactic to pull yields further down
• Market expects further downward adjustment in the yields at this week’s auction

The weekly bill auction held last week stood out as yields fell quite sharply across all maturities than before, potentially setting up the conditions for an upward sloping yield curve in the near term.
The 3 months bill yield fell below the 6 months’ for the first time since more than a year.
Some market commentators said after both phases of the auction, the Central Bank was offering amounts below the maturing amounts at the recent bill auctions as of late as a tactic to pull the yields further down from their somewhat sticky levels in the recent past.

This was particularly visible from the practice seen in the recent few weeks where the Central Bank has been offering from the benchmark 1 year bill under Phase II auction to raise additional amounts at the average yield already determined at Phase I, nearly making up for any difference between maturing amount.
At the last three bill auctions, the Central Bank managed to raise the full amounts it offered at their Phase I auctions while the final one held last week saw the Phase II of the auction also being fully taken up at a subscription rate of 3.5 times the offered amount.

The Central Bank raised Rs.130.0 billion from the Phase I auction and another Rs.32.5 billion at the Phase II auction.
Meanwhile, the yields which had been falling more modestly also fell sharply by 56 basis points (bps), 42 bps and 14 bps under 3 months, 6 months and 1 year bills at the last auction bringing the month-to-date declines to 116 bps, 75 bps and 15 bps.

Market commentators attribute this sharp decline in yields to the increased revenues by the government in recent times and the availability of a cash buffer built with the Treasury which in turn provides the Central Bank more flexibility when raising money.  
Currently the yields under 3, 6 and 12 months tenors stand at 13.35 percent, 13.41 percent and 12.78 percent.
This is despite the Central Bank keeping rates unchanged at last week’s policy meeting at 9.0 and 10.0 percent levels.

After holding rates at the levels left at their November meeting last year, the Central Bank said they see further room for yields and the rates to settle lower in the weeks and months to come before they resume their easing cycle again.  
The market expects further downward adjustment in yields at this week’s auction too and going forward helping other market lending rates too to follow suit.